HUD Mortgage Sale Could Help Thousands of FHA-Insured Borrowers but Unfairly Exclude Others

The U.S. Department of Housing and Urban Development has begun selling off thousands of seriously delinquent mortgages insured by the Federal Housing Administration, a move that could save many distressed borrowers from losing their homes. But it also leaves thousands more who are saddled with equally distressed FHA mortgages without any help, raising questions about its fairness.

HUD announced Monday that it cut loose 9,400 loans in the first sale under its expanded Distressed Asset Stabilization Program, and the federal agency plans to sell at least 30,000 more over the next year. The mortgages are going at steep discounts to private investors and nonprofit organizations, which are expected to modify many of the loans. That could save a sizable pool of homeowners from foreclosure and help keep the FHA, which faces a shortfall next year, from seeking a bailout.

While this represents a step forward in combating the foreclosure crisis, HUD's DASP program touches only a fraction of the distressed homeowners with delinquent FHA-insured loans who are in dire need of assistance. The nearly 40,000 loans that HUD plans to have auctioned off by the end of next year is just a sliver of the 700,000 seriously delinquent mortgages on the FHA's books.

A seriously delinquent mortgage is classified as a loan that is 90 days or more past due. A large swath of the FHA loans -- more than the 40,000 being sold, experts say -- are at least six months past due and in foreclosure. That qualifies them for the DASP, assuming that the mortgages' servicers have exhausted all FHA loss-mitigation programs. So that means that thousands of borrowers with mortgages that are eligible for the DASP -- and, arguably, equally as deserving of it -- won't get it and will continue to drift toward eviction.

They won't benefit, for example, from New Jersey Community Capital's plan to save underwater homeowners from foreclosure. The nonprofit organization purchased a pool of 399 of HUD's delinquent loans in the recent sale. Only 275 of them are potentially curable because those borrowers still occupy their homes, but NJCC President Wayne Meyer said that the group believes that it can modify at least half of them. NJCC aims to slash the principal balance of those mortgages down to market value, reducing borrowers' average monthly payments by at least 45 percent, he said.

For example, in one neighborhood targeted by the pool that NJCC bought, the average mortgage balance is $313,000, Meyer said. Under NJCC's plan, that would be sliced nearly in half to just $146,000. If NJCC determines that a borrower couldn't afford a mortgage even after a drastic cut, the nonprofit would offer either an option to rent the property or a nine-month window before it forecloses.

"We're offering, we think, unprecedented benefits," Meyer said.

He added that he believes that HUD won't come anywhere close to selling all the FHA loans that are eligible for the DASP, so it's a stroke of luck for homeowners whose loans got snapped up by NJCC. "If we purchased their loans, it's going to be their good fortune," he said.

HUD spokesman Brian Sullivan could not provide an estimate of the total number of FHA-insured loans that would qualify for the DASP. He said only that many of its seriously delinquent loans are eligible. He also couldn't offer specifics on how HUD chooses to sell certain DASP-eligible loans over others.

There's also an aspect of the program that could be troubling even to distressed borrowers who qualify for the DASP: Some of the borrowers whose mortgages are sold under the program stand a better shot at receiving relief than others.

HUD is selling the loans in two types of loan pools: "Neighborhood Stabilization Outcome" pools and "national" pools. Investors who purchase NSO pools, which target areas particularly hard hit by foreclosures, cannot repossess more than 50 percent of those homes. If they do, they must spend money to help revitalize those communities.

But investors who purchase "national" pools don't have limits on how many homes they can repossess. That raises the possibility that borrowers in national pools will be less likely to receive mortgage relief from the private investors who buy their loans -- because such investors do not have a mandate to save a certain portion from foreclosure.

Still, investors in national pools must wait at least six months before resuming the foreclosure process. And because they are purchasing loans for much less than the loans' outstanding balances, they have a strong incentive to cure many of the mortgages -- or at least use other foreclosure alternatives, such as short sales.

It's not surprising that Las Vegas, the poster child of the housing downturn, adds high vacancy rates to its litany of problems with overbuilding and high foreclosure rates. Between peak and trough, Las Vegas housing prices plummeted by 60.4 percent. This decline in home values in Las Vegas and other housing markets in the state have contributed to Nevada being the only state in the country where the total worth of homes is less than the total amount owed on these homes.

In October the vacancy rate in Palm Bay-Melbourne-Titusville climbed 8.3 percent from last year, the highest of all increases on this list. Homes in Palm Bay specifically are very cheap these days: The median sale price between August and October 2012 dropped by 2.6 percent from the previous year to only $76,000. In Palm Bay Colony, which, Trulia notes, is among the most-searched neighborhoods in that city, the current average listing price is just $58,704.

Unlike metropolitan areas in Florida and Nevada, the housing market crash was not nearly as bad in Ohio. In Cleveland, the price drop from peak to trough was 17.6 percent, a far more modest decline compared to cities such as Las Vegas. Despite faring better than many markets, Cleveland is not yet showing many signs of turning a corner. On top of high vacancy rates, the average price per square foot is unchanged on a year-over-year basis, and the number of sales have dropped by nearly 20 percent in the same period. Further, while 1,754 resale and new homes are for sale in Cleveland, as per Trulia’s site, another 5,451 homes are in some phase of the foreclosure process.

There are some encouraging signs in the Toledo housing market despite its high vacancy rate. The median price per square foot is up about 60 percent on a year-over-year basis, according to Trulia. Another measure, however, points to an inventory problem: For each new or resale home listed on Trulia, there are two homes in the foreclosure pipeline that are either vacant or will enter the market at some point. The peak-to-trough price decline of 18.2 percent remains a challenge in a market that saw just a 4.6 percent price increase on a year-over-year basis.

If Dayton is starting to blossom into a rosier housing market, it is not yet evident in the area’s housing statistics. In addition to high vacancy rates, the data show a decrease in housing prices per square foot on a year-over-year basis along with a drop in the median sales price. Sales volume in the city climbed just 2.6 percent in the same period. The 11.8 percent peak-to-trough drop in the area was not the worst in Ohio, but that is not much to cheer about. Still, for homebuyers, a median sale price of $73,658 must have a certain appeal.

Of all metropolitan areas on this list, Gary’s was hit the least by the housing downturn. Home prices fell just 10.2 percent between the market’s peak and its trough. Although prices did not drop massively during the downturn, the asking price in Gary fell 3.5 percent from the previous year, worse than all but two metro areas. The average listing price in Gary is just $59,939. There's something else hurting a recovery in Gary: It's become something of a ghost town.

While about seven in 10 markets Trulia analyzed showed increases in vacancy rates, the vacancy rate in Fort Lauderdale actually decreased by almost 1 percent, indicating a strengthening housing market. And although the 4.4 percent increase in asking price is far from the strongest growth of all the metro areas measured, it is among the top third. One concern is that the average price per square foot has dropped 59.3 percent on a year-over-year basis.

Like most markets in Florida, the West Palm Beach market took a major hit during the housing downturn, falling 48.4 percent during the recession. Fortunately, recovery is taking hold. The average asking price in the area is up 11.3 percent, compared to the same period a year earlier, the fifth-largest increase of all metro areas measured. Also, the average price per square foot is up an impressive 63.7 percent compared to a year ago.

Similar to markets in Nevada and Florida, the Tucson area was hit very hard by the housing downturn. Housing prices fell 37.3 percent between its peak and trough. While asking prices grew 8.1 percent year-over-year, the growth in listing price is not nearly as strong as in neighboring Phoenix, which grew by almost 25 percent in the same period. Still, the average price per square foot in Tucson is up a healthy 56.6 percent on a year-over-year basis, suggesting that the market is bouncing back.

Detroit’s housing market has taken a larger hit than most in recent years due to problems in the automobile industry. Between its highest and lowest point, home prices dropped 39 percent. The median price per square foot of just $47 is the lowest out of all 100 metropolitan areas measured. For every new or resale home listing on Trulia, nearly another three are in some phase of the foreclosure process. A troubling thought for anyone contemplating selling a home in this oversaturated market is that, despite low home prices (the average listing is under $48,000), the number of sales has actually decreased by more than 27 percent on a year-over-year basis.